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What is a Lump-Sum Distribution from a 401(k)?

Lump sum distributions are when the entire balance of an account is paid out at once. After you retire, you can elect to receive your money in a lump sum.

Of course, you will end up paying income taxes on the entire distributed amount that year. There is also what’s called the mandatory 20% withholding, which requires custodians to withhold 20% from retirement plan distributions if they are not part of a trustee-to-trustee transfer (such as funding an IRA).

If your tax bracket is lower than this 20%, you still must wait until April to get a refund. If this distribution is taken before age 59 ½, you may also have to pay the 10% IRS early withdrawal penalty.

There is an exception to that, if the account is sponsored by a company where the employee worked until age 55, distributions after that point are not subject to the early withdrawal penalty.

Another thing to keep in mind: if you take the entire amount out of your 401(k) account, and you deposit it into an investment vehicle that is not tax-advantaged, the money will no longer grow tax-free.

Keywords: taxation, retirement accounts, vesting, rollover, tax-advantaged accounts, trustee-to-trustee transfers, mandatory 20% witholding,